U.S. Economy: Confidence Decreases, Home Prices Stagnate

A shopper carries various bags through the Westfield Garden State Plaza mall in Paramus, New Jersey. Photographer: Emile Wamsteker/Bloomberg

Oct. 25 (Bloomberg) -- Consumer confidence in the U.S.
unexpectedly sank and home prices stagnated, showing why the
Obama administration and some Federal Reserve policy makers are
pivoting to stem a housing slump that is threatening the
economic recovery.

The New York-based Conference Board’s household sentiment
index slumped to 39.8 in October, the lowest level since March
2009 and less than the most pessimistic forecast in a Bloomberg
News survey, the group’s data showed today. Property values in
20 cities were little changed in August from the prior month and
down 3.8 percent from 2010, according to S&P/Case-Shiller.

“The outlook continues to deteriorate,” said Yelena
Shulyatyeva, a U.S. economist at BNP Paribas in New York. “It’s
not good for confidence when people see their main asset, their
homes, decline in value. Our best-case scenario is we’ll muddle
through.”

Federal Reserve Bank of New York President William C.
Dudley this week said breaking the ‘vicious cycle’ of declines
in home prices and confidence should be a focus for the central
bank as it tries to spur growth and bring down joblessness. The
government yesterday announced a plan to help borrowers get
lower-interest mortgages for their devalued houses as President
Barack Obama acknowledged prior efforts hadn’t done enough.

The disappointing data and declining shares of United
Parcel Service Inc. and 3M Co. after the economic bellwethers
reported results caused stocks to drop, halting a three-day
rally. The Standard & Poor’s 500 Index fell 2 percent to
1,229.05 at the close in New York.

Survey Results

Estimates for the confidence index in a Bloomberg News
survey of 76 economists ranged from 42.5 to 52. This month’s
reading was even lower than the 53.7 average during the 18-month
recession that ended in June 2009.

The report showed Americans’ outlooks for employment and
incomes soured. The share of consumers who said jobs were
plentiful dropped to the lowest level since December 2009, while
the proportion expecting their incomes to rise over the next six
months decreased to smallest in a year.

The report is in line with other surveys. The Bloomberg
Consumer Comfort Index’s monthly expectations gauge dropped in
October to the lowest level since February 2009. The Thomson
Reuters/University of Michigan preliminary index of consumer
expectations for six months from now dropped in October to the
lowest since May 1980.

Sales Outlook

The drop in optimism helps explain why companies like Levi
Strauss & Co. are concerned that spending will be restrained
during the holiday shopping season. The San Francisco-based
company is bracing for tepid sales after back-to-school shoppers
balked at higher prices on its namesake jeans and Dockers pants.

“It is hard to imagine a very robust holiday season
compared to last year,” Chief Financial Officer Blake Jorgensen
said in a telephone interview Oct. 11. “We remain cautious
around where the future is going over the next couple of
quarters.”

UPS, the largest package-delivery company and a proxy for
the economy, said today international shipping began to cool
while U.S. expansion stagnated. 3M, the maker of products from
LCD television parts to Scotch-Brite sponges, cut its 2011
profit forecast.

The drop in consumer confidence has yet to translate into a
slump in household spending, which accounts for about 70 percent
of the economy.

Pickup in Growth

A Commerce Department report in two days is projected to
show the world’s largest economy grew at a 2.5 percent annual
pace from July through September, almost double the prior
quarter’s 1.3 percent gain, according to the median forecast of
economists surveyed. Consumer spending is projected to have
climbed at a 1.9 percent pace after increasing 0.7 percent in
the previous three months.

Persistent joblessness remains a concern. Unemployment has
held close to or above 9 percent for 30 months. Through
September, the economy had recovered about 2.09 million of the
8.75 million jobs lost as a result of the 18-month recession
that ended in June 2009.

The report from S&P/Case-Shiller showed home prices dropped
in 18 of the 20 cities tracked in the year ended in August, led
by an 8.5 percent decrease in Minneapolis. Home prices in Las
Vegas made a new post-slump low. Detroit and Washington were the
only areas showing year-over-year increases in property values.

Dudley yesterday said falling home values pose “a serious
impediment to a stronger economic recovery” and predicted
“continued modest growth” for the U.S.

‘Vicious Cycle’

“Continued house price declines could lead to even more
defaults, foreclosures and distress sales, undermining wealth,
confidence and spending,” Dudley said in the text of remarks
given at Fordham University in the Bronx. “Breaking this
vicious cycle is one of the most pressing issues facing policy
makers.”

The Federal Housing Finance Agency yesterday said it would
allow qualified homeowners to refinance no matter how much their
homes have declined in value, expanding the terms of the 2009
Home Affordable Refinance Program. The agency said it would also
eliminate some fees, reduce others and waive some risk for
lenders.

The original HARP program had a goal of reaching 5 million
borrowers. As of August, fewer than 895,000 loans had been
refinanced.